San Francisco City & County Employees' Retirement System's new chief investment officer wants to overhaul the system's portfolio, hiring equity managers that short the market or run specialized portfolios and diverting some fixed-income assets into hedge funds.
William Coaker Jr., who started as CIO of the $18.3 billion fund at the end of January, told the retirement system's board Wednesday that the changes are needed to make sure the system will meet its 7.5% assumed rate of return in the future.
He did not reveal a timetable for any changes, saying in an interview that the purpose of his talk was to present his general investment philosophy.
The pension has a current allocation of 55% to equities in long-only strategies. It has no money invested in hedge funds.
In his presentation to the board, Mr. Coaker said the system's long-only equity strategies slightly underperformed their benchmarks over the 10-year period ended Sept. 30. He said more concentrated portfolios, such as China-only equities, or alternatives strategies that involve shorting, such as 130/30 strategies, are ways to boost returns.
The system's $5 billion domestic equities portfolio returned an annualized 7.85% in the 10-year period compared to the Russell 3000's 8.11%, according to fund statistics. The system's international equity portfolio returned an annualized 8.57% in the period vs. 9.06% for a customized benchmark.
Mr. Coaker said he plans to put investment staff on the road to China and to visit domestic managers to find those that can deliver the alpha necessary for the system to increase its equity returns. He said travel restrictions in the past prevented staffers from getting on the road, limiting the due diligence necessary to source investment opportunities.
He said the shift into hedge funds is needed because of the low-yielding fixed-income environment. He said fixed-income assets make up 25% of the total fund's assets, too large an amount given the low expected returns.
In the interview, Mr. Coaker said he would not disclose now how much he wants to move into hedge funds.
The system's general investment consultant, Angeles Investment Advisors, recommended in 2012 that the San Francisco system begin investing in hedge funds, but the idea was rejected by the board. On Wednesday, however, board members said they were open to Mr. Coaker's ideas.
The board on Wednesday also committed $50 million to a $150 million co-investment fund run by real estate manager Harrison Street. The system already has $50 million invested in the manager's Fund IV.
It also committed $50 million to a fund run by distressed debt manager SSG Capital Management. The name of the fund could not be learned.